06 Apr Is Your Financial Advisor a Broker? He is probably nervous about tomorrow.

You may not believe this, but the vast majority of financial advisors are NOT legally bound to act in their clients’ best interest. These are the advisors who work for America’s largest brokerage firms and manage investments in the trillions.

Come tomorrow, thanks to the Department of Labor’s new Fiduciary Rule, these brokers will have to change the way they do business that will require them to act in their clients’ best interest. But beware because the rule only requires them to act in the best interest of your retirement accounts, such as IRAs, not your entire financial situation.

It has to do with two different standards: Suitability and fiduciary. Up until now broker-dealers were only required to use a “suitability” standard, which means they recommend investments and advice that’s “suitable” to their clients’ needs, but may conflict with their clients’ best interest. In other words, they may get you into expensive investment products that pay them handsome commissions and don’t usually out-perform much more cost-effective index funds.

“Fee-Only” advisors have always been held to a fiduciary standard.

The fiduciary standard requires advisors to put their client’s interests before their own. “Fee-Only” advisors have always been held to a fiduciary standard. It’s clearly a “no-brainer” for your financial advisor to be required to act in your best interest, but ask a broker-dealer and you’ll get a very different story.

Brokerage firms have plowed millions and millions of dollars into lobbying against this rule, but Congress stood firm this time. The Fiduciary Rule is good for Main Street because it should lower clients’ fees and demand more appropriate investments like exchange traded funds (ETFs). As a result, pundits are calling for a $1 trillion inflow to the ETF industry. ETFs are low-cost investments that are similar to mutual funds, but with lower costs. If ETFs aren’t part of your portfolio right now it probably means you are working with a broker, because they can’t make upfront commissions and large annual fees on ETFs.

You may want to seek out a Fee-Only Registered Investment Advisor

If you are working with a broker-dealer and this news comes as a shock then you may want to seek out a Fee-Only Registered Investment Advisor, who under a true fiduciary standard, is legally bound to act in your best interest—and that means YOU, not just your retirement accounts.

Starting tomorrow brokers all across the country will have to start rehearsing conversations they will have to have with their clients, which will probably go like this, “You know all of those investments I told you were so great… we need to make some changes.” But the truth be told, it should sound more like this… “I’ve been charging you huge fees for years and now there’s this new rule that won’t let me do that anymore.”